The government of India substantially increased the Minimum Support Price (MSP) of 14 summer crops this week, ahead of the 2019 Lok Sabha elections. The Cabinet Committee on Economic Affairs (CCEA) cleared an average of 4-52 percent hike in MSP of summer crops.
The support price fixed this time is at least 50 percent higher than the cost of production. This decision will put an additional burden of around Rs 15,000 crore on the government.
Meanwhile, the decision was almost as expected by the agrarian community.
Slow farm growth and increasing farmer distress have been upsetting the government for the last few years. A double-digit food inflation and higher fiscal deficit forced the government to hike the MSP in single digits in previous years.
But in the last budget, Finance Minister Arun Jaitley assured that the government would increase the MSP of kharif crops to 1.5 times of the cost of production.
The highest increase in MSP was seen in ragi, whose prices were set at Rs 2,897 against Rs 1,900 in the last kharif season.
The MSP of paddy, the largest crop grown in Kharif season, was also hiked substantially. As against its last season, support price was raised by Rs 200 to Rs 1,750 a quintal.
For cotton, depending on the quality of produce, the support prices have been increased by 26-28 percent. For minor crops like nigerseed and jowar, the hike is comparatively very high.
Prima facie, the hike looks impressive as it is the largest ever proclaimed by any government for most of these crops. Usually, an abnormal increase in MSP leads to higher production as farmers shift to better-yielding crops.
However, the real impact on prices will be seen once the harvest starts coming into the market by October. An efficient and proper procurement mechanism from the government is needed for farmers to get the increased price benefits to their income.
As per a report submitted by the government-appointed committee on restructuring food crop in India, only 6 percent of total farmers in the country can sell their crops at MSP.
The farming community expects that the government will find ways to bring in more farmers under MSP belt to attain the real advantage of the increased price. Though there are 20 crops for which MSP has been raised, procurement is effective only on paddy and wheat.
In the meantime, increased support prices may cause a rise in food prices and pickup in rural spending. It is expected that the hike may add about 50-80 bps on our headline inflation based on CPI over the next one year. The increased MSP could hit our export competency also.
If export prices are less attractive, it may result in a glut in the domestic market, leading to a drop in prices later in the open market. Less competency in international trades, which has already been hit due to weakening rupee, may further worsen the sentiment.
Moreover, higher production is likely to raise the need for proper warehouse facility as well. As per the ministry, the government will add more storage capacity by 2020. Still, the real impact of such a substantial hike will depend upon the implementation this time.Disclaimer: The author is Head Commodity Research at Geojit Financial Services. The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.